We all want to make the future of our children or grandchildren easier. The first thing we think about is giving them the chance to get a good education. However, the increasing cost of education is a concern for many families. Would you like to plan ahead and save for your children's education? We will guide you towards the best formula to adopt and the right time to start saving.
The savings account, reassuring but unattractive
The legendary savings account (or savings book) continues to attract some people. It is both safe and easy to use. However, the recent fall in interest rates has made it less and less attractive. Banks are trying to attract minors by offering different possibilities such as "junior" plans. But although these rates are slightly better, it is not enough to compensate for inflation, so much so that the profitability remains generally negative.
In the long term, therefore, a savings book is not the best strategy. When your child reaches the age of majority, you may be disappointed by the small amount he or she will receive compared to the savings effort you made for him or her. On the other hand, a big advantage is that a savings account is risk-free, has no maturity and often no entry or exit fees. It also lets you choose the amounts you pay in and does not impose any regularity of payments.
In short, a savings account can still be a good short-term solution. For example, if parents are planning to pay in larger or smaller sums for a teenager as he or she approaches the age of majority.
In your name or in your child's name?
Whether you open the account in your name or in your child's name, the implications are very different and should not be taken lightly.
An account opened in the child's name, of the "junior" type, will have a slightly better return. Furthermore, once your child has reached the age of majority, you will not be able to decide where the funds will go or how they will be used. In fact, your child will be able to choose what to do with the money.
If something happens before they reach the age of majority, you can still take the money away if it is considered to be "in the child's best interests".
However, if you open an account in your own name, you will not benefit from the advantages of junior accounts. But in any case, you remain the sole decision-maker as to what to do with your savings.
Life insurance: a good return in the long term
Do you want to combine protection for your loved ones with good savings security? The life insurance policy is the formula that should suit you. It is taken out by the parent, with the child as beneficiary.
You can choose between two types of contract: the first with a profit-sharing return and the second allowing you to benefit from stock market returns.
The small difference with a simple savings account is that the life insurance contract is much less flexible! The amount and frequency of premiums are fixed at the outset: to be paid monthly or annually. The amount of capital guaranteed at the end of the contract is also decided when the contract is signed: the child will receive the agreed amount on a fixed date, for example at the age of 21 (not necessarily at the age of majority).
In the event of the parent's death, the insurance company will pay the remaining premiums due to ensure that the agreed capital is paid out to the child at the set date.
In Luxembourg, this type of contract allows you to benefit from tax advantages provided that the contract runs for at least 10 years: amount capped at €672/year multiplied by the number of people in the household (spouse, children, etc.).
In other words, the life insurance policy is only advantageous in the long term, when parents show foresight in advance. There is no room for improvisation or changes when signing this type of contract: the penalties or fees for early withdrawal from the contract are sufficiently high to be dissuasive!
Investing rather than saving?
These days, parents are increasingly considering investing rather than saving for their child's future education. This is mainly for reasons of profitability, as interest rates on savings are extremely low, even reaching the rate of inflation.
Your choice will depend on your financial capacity, your values, your investor profile and your taste for risk... If you are financially comfortable, why not invest! On the other hand, if your income is barely enough to save, remain vigilant because any investment involves a risk.
You could also consider different solutions: why not take out a life insurance policy while at the same time making different investments that are more or less risky? That way you won't be putting all your capital into one investment! You guarantee your children a basic capital to start their studies, while giving yourself the opportunity of a small bonus.
The sooner the better!
In any case, the ideal is to plan a savings solution from a child's earliest age, or even from birth. The earlier you start saving, the more you can spread your effort over time, the more you can make your capital work for you, and the higher the amount when your youngster needs it most!